The financial crisis demonstrated extraordinary failures on the part of policy elites and economic experts. And yet we remain governed by technocrats. We need to re-politicise economic policy-making, or else repeat the mistakes of the past.
Why should we grant individuals or small groups the authority to govern without democratic intrusion? One standard justification is that they possess a form of expertise which enables them to govern better than representative or participatory democracy ever could. Technocrats are not autocrats because they know what they’re doing and everyone will be better off if they’re left alone to do it.
A particular type of technocrat, the econocrat, is afforded a degree of deference usually associated with medical professionals, engineers or natural scientists brought into the policy arena. Scandals surrounding Foot and Mouth disease, BSE, and GM crops eroded public confidence in scientific expertise, and ushered in experiments with participatory risk management which fundamentally questioned the governing role of technocracy. The economic crisis poses similar questions as to whether the econocrats really know what they’re doing, but appears to have had no comparable impact. There is much popular hostility towards bankers but that has not translated into a more general questioning of the social status of economic expertise.
As past experiences demonstrate, failure to see a crisis coming is par for the course in all economic cycles. Nonetheless the failure of present day economic experts, using , to raise the alarm about the banking crisis beginning in 2007 was truly startling. A by the Dirk Bezemer of the University of Groningen, for example, identified some 10 economists who did so. One of the ten, Professor Steve Keen, has pointed out that what really unites this grouping is their collective distance from the mainstream neoclassical economics taught in universities, which treated the financial system as a neutral intermediary for ‘real’ exchange and ignored the significance of the dynamics of private debt.
The most remarkable thing about this though is not so much the ex ante failure of prescience, but the fact that ex post there has been very little change in terms of what is considered reliable economic expertise. The crisis did induce a short lived questioning of expertise but that was followed by a remarkable re-legitimization.
Take central banks for example. In the 1980s and 1990s, central banks were granted independence from political interference on the grounds that they were competent in technical matters of monetary policy which should be insulated from political pressures. Elite central bankers were either oblivious to or non-plussed by the asset price bubble expanding through the 2000s – fixated as they were on targeting price inflation. But, Mervyn King, Ben Bernanke and Jean Claude Trichet all not only retained their posts after the crisis, but were handed a greater level of responsibility than ever before.
With governments in the EU, US and UK either politically incapacitated or ideologically set against both a serious active fiscal policy and fundamental banking reform, they were handed a larger role after the crisis in a form of central bank led capitalism. Unaccountable econocrats have been implicitly tasked with preventing a depression and/or securing the recovery through rounds of quantitative easing in the US and the UK, and the extension of ultra-cheap loans to Eurozone banks through the European Central Banks’ Long Term Refinancing Operation.
Besides central banks, one could similarly point to university economics departments, private banking institutions, the IMF and the business press as further cases where epic failure has gone unpunished and the claims of authority have not been challenged. How has this come to be?
Most of the major reflections on what-went-wrong, from the Treasury’s Bischoff Report of 2009 to the Independent Commission on Banking of 2011, have framed the financial crisis as a form of technical accident, an identifiable engineering error in a mechanical system: incentives in the banks were set wrong; regulators paid too little attention to systemic risks; derivatives became too complicated to manage; mathematical risk models were unfit for purpose.
One effect of this framing has been to solidify the position of existing technical experts within the system. The framing suppresses the political dimensions of the crisis (an oversized banking system capable of undermining democratic politics) and ignores the radical technocrats such as Adair Turner and Andy Haldane who have asked more fundamental questions about the social contribution of financial services. Given this framing, the task at hand is to rectify the discrete flaws in an otherwise sound system by making existing forms of regulation more complex and more responsive.
And so, as dubious firewalls are erected to separate retail and investment banking, neoclassical macro-economists to retrospectively incorporate financial market imperfections. Things change in order that fundamentally things stay the same. Rather than the outcome of a serious learning process, these texts and new models are a performance of reflection in the genre of auto-biography, they expose the protagonists’ weaknesses and shortcomings, but never so much as to fully undermine their standing.
Institutional learning is hard to find, especially in the finance ministries of Europe and the USA which one might expect to be now playing a key role in guiding and evaluating central bank led policy. One of the more serious pieces of reflection was published by the Treasury last month (). Though it received precious little media coverage, it provides a damning account of the state of government economic expertise in the first British department of state after the crisis. The Review gives us an extraordinary picture of the Treasury as an organisation with an institutional intelligence derived from the Northcote Trevelyan reforms of the mid 19th century. The ‘generalist’ administrative elite created for 19th century conditions still rules in the premier department of the British state. There’s a reason the Treasury was caught napping by the crisis: it did not have the resources to cope with, nor the expertise to recognise the magnitude of problem. The Review shows that when Lehman went under in September 2008, a full year after the collapse of Northern Rock, the Treasury had just twenty staff working on financial stability out of a staff complement of some 1400.
And there’s not much hope of deploying more expertise. Public expenditure cuts mean that total numbers employed by the Treasury will actually fall to 1,000 by 2014. Moreover, there are huge difficulties in retaining experienced staff because annual turnover is 25 per cent of total numbers and the average (median) age of Treasury staffers is 32. This remains, in other words, a classic Northcote Trevelyan department: a department of naturally bright generalists capable of rapidly picking up a subject and then moving on. The only difference is that a generation ago mid-career civil servants moved on to greener pastures in the rest of Whitehall; and now bright youngsters exit for better paid jobs in the private sector.
The lack of resources and the generalist culture inside the Treasury combine to align the department with the enclosed mindset of Westminster politics and the metropolitan centres of power in our financialised economy. We might expect a ‘lessons learnt’ review to try to draw on information from as many sources as possible but the Treasury Review was carried out in a way that epitomises the narrow metropolitan bias of a department which looks in the mirror and is not displeased before it turns to seek out interests and institutions that look like itself and think like itself.
Consider Appendix C of the Review report. This lists thirty-eight organisations consulted by the Review and provides a roll call of the powers and peers that matter in the mindset of the Treasury’s administrative elite. This is a network map of relevant national and global elites, and is as illuminating for who is excluded as for who is included. Barclays is in; the Cooperative Bank is out. Plenty of corporate groups are in: Credit Suisse, Goldman Sachs, KPMG as well as the BBA and CBI; not a single banking trade union or voice of the mutual sectorexcept indirectly via the TUC. Plenty of foreign finance ministries (New Zealand, France, Germany) andthe Mayor of London, but none of the devolved governments.
This follows in the vein of earlier Treasury reports on the crisis, most notably the [pdf] of 2009, which reasserted pre-crisis claims concerning the social value of finance in the face of mounting evidence to the contrary. Analysis by CRESC of the Bischoff Report working group shows that of the members’ combined 662 years of work, 495 were spent in City institutions. The eight person secretariat contained only one civil servant as compared to four from Citigroup and three from the City of London Corporation.
These facts are less surprising when put in the context of evidence concerning the extent of corporate lobbying taking place at the Treasury. In the most recent revelation, Freedom of Information requests byshowed that in the 15 months prior to June 2011, Chancellor Osborne and his ministers were met hundreds of times by corporate interest groups, with representatives of the financial services industry enjoying hugely disproportionate access to organisations representing broader swathes of the public.
The main legacy of this disposition towards the interests and expertise of the banks is of course UKFI, the vehicle established by the Treasury to manage the public’s stake in the part-nationalised banks in 2009. The UK governments’ bank bailouts brought about a sudden repoliticization of economics and finance which went against the grain of the preceding 30 years of deregulation, proving Karl Polanyi’s famous adage that while laissez faire was planned, planning was not.
The nationalisations prompted searching questions of what a better banking system might look like, and what role government would play in bringing it about. In the form of RBS and Lloyds TSB, the Treasury found itself largely responsible for two institutions which could have been restructured and put to a number of purposes: dramatically shrunk or broken up into smaller units to alleviate problems of too-big-to-fail and the increasingly monopolistic conditions of high-street banking, or even redirected towards more socially useful lending in the form of an industrial or green investment bank.
No such thoughts were entertained, and under the stewardship of former bankers Sir Philip Hampton and Glen Moreno the nationalised banks were set on a course to return to business as usual as soon as possible. Once losses have been socialized, the pressure is on to privatize gains. Run almost in the manner of a private equity firm, the sale of the shares to the first willing private investor (as with Northern Rock’s transition to Virgin Money) is myopically judged to be the best manner of delivering ‘value for money’ on the taxpayers’ investment. In the meantime, RBS has even for lending to small and medium enterprises.
The problem with UKFI was not simply that the Treasury lacked the capacity to take greater in-house responsibility for the management of their investments and was thus dependent on private sector expertise. Rather, it was in any case predisposed towards mimicking the private sector model as closely as possible. UKFI was established to operate at ‘arms length’ from the democratic process, eliminating the most serious pressure point for radical financial reform and ensuring that public ownership would not equate to democratic control.
Clearly, there is a need for the Treasury to form a new administrative culture appropriate to the 21st century, not to the 19th. It needs to make a long term commitment to developing professional expertise on finance, to admitting and nurturing heterodox analysis and opinion, and to holding onto the experts once they are trained up.
Larry Elliot is right to say we need a similar review to that produced by the Treasury for the Bank of England. As a Treasury Select Committee report published in October outlined, there is an urgent need for greater accountability in the institution as it now regains the regulatory territory lost to the Financial Services Authority in 1997, and adopts an all-encompassing responsibility for financial stability. And if the Bank of England does a ‘lessons learnt’ review, it is necessary that it be more reflexive, inclusive and open than the Treasury’s effort.
There is little indication of moves in this direction. Instead a familiar form of hubris surrounds the Bank’s current conduct. As with the Federal Reserve and the ECB there is little sense in which either the short or the long term consequences of the Bank of England’s unprecedented liquidity injections are understood. We have arrived back in a position akin to that of exotic derivatives pre-crisis: stop worrying, and trust the experts.
This trick will be harder to pull off than previously. Trust in elites of all kinds and by all measures are touching all time lows. Recent flurries of media interest in modern monetary theory and the spat between Steve Keen and Paul Krugman over the role of banks in money creation suggests a growing appetite for economic iconoclasm and a growing audience for the marginalised heterodoxies.
Any challenges are unwinnable, however, if the political architecture remains unchanged. Neoclassical economics has won, not because it describes reality accurately, but because it describes a reality which dominant interests want. It would help to have a new breed of more competent and modest technocrats and economic experts. But the first priority is to have a revitalised democratic politics, in which economic expertise is treated as provisional and uncertain rather than trusted unconditionally, and in which the illusory dividing line between the economic and the political can be broken down.